Intuitively it sounds like a very reasonable theory. With call options investors can speculate on rising prices, with puts they can place their bets on falling stock markets. If relatively more calls than puts are being bought, speculators apparently are optimistic.
put/call ratio get lots of press
Trader blogs are paying close attention to this put/call ratio (Vix and More and MarketSci). Even the derivative exchanges like Chicago’s CBOE publish call/put ratio’s. They even run a derived call/put ratio index. They are missing the point. The only reason this call/put ratio is mentioned now and then is the commercial newsletters have to be filled with “analysis”. Retail traders are having a hard time making a living anyway, and will put their faith in any possible combination of indicators that will justify their trading decisions.
Why put/call ratio makes no sense
- In the professional market calls aren’t really different from puts. A delta-hedged call has the same pay-off as a delta-hedged put in the same strike. If there’s no distinction between calls and puts, the ratio doesn’t make sense.
- For every single buyer of an options contract, there is a seller too. Hard to say who is right.
- As expected, there has been no statistical evidence of any relationship between call/put ratios and stock performance.
- All market participants have slightly different objectives. Arbitrage against other instruments, hedging underlying portfolio’s, outright speculators.. The casino-idea that professional traders are selling options to the retail investors, is not true.
As a true kind of financial “common knowledge”, the call/put ratio won’t ever disappear. All tools can and will be used to find the holy grail of the market’s crystal ball.